States with the Most Miserable Housing Markets

Home prices fell in December to the lowest levels since the housing crisis began in mid-2006, according to the Standard & Poor’s Case-Shiller Home Price Index. While other housing statistics certainly suggest that a recovery may be underway, home prices and foreclosures continue to point to a struggling market.

Trulia, an online real estate search and marketing site, recently published its Housing Misery Index. The index ranks each state’s housing market by the change in home price and the rate of delinquencies and foreclosures. Looking at housing and economic data from a number of sources, 24/7 Wall St.’s analysis of Trulia’s index finds that the states with worst scores suffer from many of the same problems.

The Housing Misery Index shows the clear impact of the housing market bust on local economies and individual homeowners. The drop in home prices captures the impact on household wealth and consumer spending, Trulia’s chief economist, Jed Kolko, told 24/7 Wall St. in an interview. Meanwhile, delinquencies and foreclosures reflect the number of residents struggling to keep their homes. “Bigger price declines plus more delinquencies and foreclosures equal greater misery,” Kolko says.

Most of the states with the worst housing misery scores are also ones that experienced some of the greatest home construction booms during the first half of the decade. When the market collapsed, states such as Arizona, Nevada, Florida and California became flooded with large inventories of unsold homes and high vacancy rates. According to Kolko, “These states had the most overbuilding during the bubble, and those empty homes have caused prices to fall and are still keeping prices low.”

Not all of the states with the highest housing scores are suffering from overbuilding during the housing boom. For some, the scores simply reflect permanently weakened home demand that is the result of decades-long industrial decline. In Michigan, for example, home prices have dropped as critical industries, including auto and chemicals, have substantially contracted their operations in the state. The persistent lack of demand for housing simply was made even worse by the nationwide recession.

In many of the worst-off states, demand is finally on the rise. States like Florida, Arizona and Nevada, which suffered during the housing bust, still appeal to many buyers. These states “are still top retirement destinations and are now more affordable than they have been in years. Low prices will attract people to these areas longer-term as those markets return to normal,” Trulia’s chief economist says.

Of course, for states where the housing collapse was not the result of overbuilding, as is the case for Michigan and Rhode Island, the long-term outlook is not as good. Although home prices are at bargain prices in these states, a meaningful increase in new home buyers is missing. These local economies are suffering from long-term problems that likely will continue after the national housing market has recovered.